You're viewing posts tagged; "Author: Richard Dyson"

19 February 2012 7:00 AM

One shopping chain that is thriving in recession-hit Britain is Brighthouse, the hire-purchase firm selling TVs, furniture and white goods through its 243 stores and online.It already has over 200,000 customers paying for goods by weekly instalments - and it reckons it can reach five million more.My advice is to steer clear.Brighthouse is highly profitable for a number of reasons, and here are just a few:

Investment trusts do have problems, such as the discount between the traded price and the underlying assets' value; or the fact that they are sometimes not easy to trade. And HL's investment analysts are quick to point these out as reasons why the trusts are not promoted. The firm's founder, Peter Hargreaves, has gone further, claiming investment trusts are 'fuddy-duddy' vehicles, doomed to die like dinosaurs.

So last year when asset manager Fidelity took the unusual step of launching an investment trust, as opposed to the more usual unit trust, it was surprising to see how aggressively HL promoted it. For weeks, HL's website hosted a large banner advert for the new fund. HL also mailed its clients with thousands of leaflets and DVDs, inviting them to subscribe. The fund was Fidelity China Special Situations Investment Trust - which has disappointed more or less ever since (as these headlines, from this week, show).

But performance aside, the fund's promotion raises interesting questions about commission. Very unusually for an investment trust - as I have complained before, see earlier blogs - this fund pays commission to intermediaries such as Hargreaves.

So what we have is the curious spectacle of a leading fund broker, which has not in the recent past promoted investment trusts, which in turn do not normally pay commission, suddenly promoting one - which does.

Commission bias? That is certainly what it smells like. And whereas commission bias might be forgiven where people make money, it is not so readily overlooked where - as in this case - they lose it.

07 October 2011 5:29 PM

House prices slumping by 50 per cent or more. Big-name companies failing in their hundreds. The FTSE declining for decades in a series of steep crashes, interspersed with smaller rallies.

These are the apocalyptic visions of respected - and to date uncannily accurate - economist and investment manager David Kauders.

For many years Kauders, who recommends his clients invest only in UK and US government bonds, has warned about rising levels of debt. In the late nineties, for instance, he warned that 'with growth in GDP less than growth in lending, the sensible conclusion is that America's boom is artificial.' As you would imagine, his warnings became more strident as time went on.

The credit crunch and banking crisis of 2008, which he more or less predicted, has given him greater authority. Now he has outlined in detail what he thinks will happen next in his book The Greatest Crash.

06 August 2011 8:58 AM

Shares in FTSE 100 broker Hargreaves Lansdown dropped a shocking 18 per cent last week - a week in which the rest of the market, awful enough, lost about ten per cent.

Why the kicking?

The answer is that at noon on Monday, August 9, the Financial Services Authority published a statement on how it wanted commissions between fund groups and brokers like Hargreaves to be disclosed. It also suggested it might ban such commissions altogether.

It took the afternoon for the market to absorb the contents of this paper and make the link to the fact that 35 per cent of Hargreaves' revenues are in the form of commissions paid by fund groups. By Tuesday market opening the penny had dropped and Hargreaves' shares followed suit, with a 13 per cent plunge.

The FSA was spot-on, although it now needs to go ahead and implement the proposals. We have called for an end to secret commissions here and here and elsewhere too for years.Other market commentators and participants agree. Read comments on this thread on citywire.co.uk. But what now for Hargreaves Lansdown?

17 February 2011 5:03 PM

All it did was highlight (again) a Government utterly conflicted on the issue of credit.On the one hand the Government screams for banks to get their house in order (ie, recapitalise, by reducing lending). On the other, it screams for banks to ease the housing crisis (ie, by lending more).

And so the conflict rumbles on, more or less ad infinitum. Say the one thing here; the opposite there.

What a party it must have been at the summit (Tuesday 15, 2011), with everyone wringing their hands and feeling so sorry for the first-time buyers - mouthing the same old arguments about the same old problems, and coming up with the same old 'solutions' (such as part-ownership, where first-time buyers are to be persuaded to borrow money over 25 years to buy just half a house!).

No-one, including Shapps, needs to be told that more loose lending, especially after the bank-busting binge we've all barely survived, is not a solution. The real answer to the FTB problem - as Shapps also surely knows - is that house prices must fall. The big elephant in the room at the summit was singing it out at the top of its elephantine voice.

07 November 2010 6:30 AM

Each week secretive mortgage company Capstone turns to the courts to seek possession of scores of borrowers' homes.

Financial Mail on Sunday estimates that while Capstone administers mortgages representing under 0.5% of the UK's mortgage market, it is responsible for 10% of repossessions. This shocking disproportion is perhaps one reason why there are unconfirmed rumours that the Financial Services Authority is investigating the company.

Firstly, the bonds promised a high rate for savers so were an easy sell.

Secondly, the bonds' provider, Keydata, paid high levels of commission to the society. And earning commission is what the salesmen were under pressure to do.

Today we have the mess of Keydata's failure, with questions hanging over whether or not any of savers' money is recoverable. N&P's boss Matthew Bullock, left, is frantically making eleventh-hour bids to avert outright catastrophe. As well he might: this affair is a blot on the society's record. Even if it doesn't wreck N&P financially, the episode will justly undermine members' faith in the management of their business.

08 October 2010 9:15 PM

Over the past five years unitholders in Neil Woodford's flagship fund Invesco Perpetual High Income have enjoyed returns of 42 per cent.

By my calculations the fee income the manager has derived from this fund - which runs to hundreds of millions of pounds - has grown by a rather more handsome 150 per cent over the same period.

It's arguably unfair to pick on Neil Woodford rather than any other successful fund manager. But Woodford is well known and has been, among even the minority of fund managers who outperform more or less consistently, very successful indeed. So he's the one I'm picking on. Woodford has managed the hugely popular Invesco Perpetual High Income portfolio since 1988.

Fifteen years ago, in 1995, this portfolio was worth about £500 million.

By 1999, it was worth £2 billion.

By 2003 - that's after the dotcom crash - it was still in the £2 billion region. And after that, according to figures from fund analyst Morningstar, this portfolio really ballooned. It pushed past £4 billion in 2005; £7 billion in 2006 and £9 billion in 2007. It's worth £9.5 billion now and could easily surpass £10 billion this year.That's not bad going, considering Woodford's company Invesco Perpetual takes 1.5 per cent of clients' assets as its annual fee. In rough terms the fee income generated by this fund has grown from an annual £7.5 million to £142.5 million in fifteen years.

That is an increase of some 2,000 per cent. Woodford's clients' gains - and I'm not complaining about those, by the way - have not been quite that spectacular.

I'm not suggesting Woodford's not done a good job. On the contrary. This graph, from Financial Express, shows just how consistently Woodford (blue line) has beaten his rivals (red line) over the past decade. Returns are averaged across all portfolios managed.No. What I am questioning is whether the job he's done has improved sufficiently to merit that truly staggering increase in fees.

What's Woodford doing for clients in the High Income fund today that he wasn't doing in 2000, 1995, or 1990?

Vastly more, you would hope. But, in fact, probably less.

As Woodford's fame and fortune has grown - built on the back of the confidence placed in him by these earliest private investors - he has branched out to run funds for all-comers. Doutbless his employers at Invesco urge him to take on as much work as possible, such is his pulling power. And so today, apart from this gargantuan High Income portfolio, Woodford runs 14 other portfolios leading to a total of assets under his management which I reckon tops £20 billion.Invesco's yearly fee income on this lot must be in the order of £200 million. (Some of the money has to be paid to middlemen, like broker Hargreaves Lansdown, which earn millions in annual commission from recommending Woodford.)

Whichever way you look at it, Woodford has become a one-man fee generator on a truly miraculous scale.

What investors should ask is that Invesco Perpetual acknowledges the riches that it's milking on the back of Woodford, and shares some of them with his private client fans. How about cutting the management fee a little, for every successive billion of fund inflows?

Such is the depth of vested interest in the fund management industries, and the companies specialising in fund distribution (like Hargreaves Lansdown), that the idea would be laughed at. But it is a practice which some more progressive fund managers are beginning to adopt, especially in the US.

There is a fundamental inequality here between provider and client, which Woodford's burgeoning fees highlight.

Fund managers do not provide the capital - their clients do.

Fund managers do not carry the risk of their decisions - their clients do.

And yet, despite the above, when the clients' assets grow - and that could be down to the fund managers' skill, or (more likely in the average manager's case) down to the general drift of the market that any chimpanzee could capture - the fund manager takes more of those assets for himself.

Heads the fund manager wins, tails he doesn't lose.

Someone's being a bit of a dupe in this scenario. It's not Neil Woodford.

I emailed Invesco asking whether it could consider cutting the fee on High Income. No reply.

SOLUTION

There's one solution for private investors who want Woodford's skill but don't want to pander to his greed.

Woodford has managed Edinburgh Investment Trust since late 2008 and done pretty well: consistently, at least, with his approach at the other funds he runs.

Edinburgh's board contracted him to run the £1 billion fund after Fidelity, the former incumbent manager, was dumped for underperforming.

Maybe I'm naive to think that Edinburgh works harder for its shareholders than Invesco does for its unitholders. But there are a few clear points in favour of the Edinburgh Investment Trust structure.

Firstly, as a shareholder in Edinburgh, you get see every holding that Woodford has spent your money on, as the full list is published at least annually.

This is not the case with High Income where - as I have reported previously - Invesco neurotically refuses to publish holdings as if they were cherished secrets of state.

Secondly, you get to go to Edinburgh's annual meeting where you can quiz the trust's chairman. This will be the man or woman who sacks Woodford if he disappoints. Edinburgh's current chairman is resigning shortly but in getting shot of Fidelity in 2008, the board showed it was capable of action.

Such is the joy of investment trusts. You have a layer of people paid by and working for you. You hope they will kick useless managers' backsides on your behalf and, at the very least, you're entitled to demand that they do.

Thirdly, and most importantly, Edinburgh is cheaper. It comes at roughly half the cost of High Income. The total expense ratio of Edinburgh is 0.7 per cent. High Income's TER is 1.6.8 per cent.

There is a niggly performance fee which Invesco managed to get Edinburgh's board to agree to, and which would push up Edinburgh's TER in some circumstances. It is capped, however.

Of course Edinburgh is not the same as Woodford's other portfolios. You can use the Morningstar portfolio analysis tools to check what sort of holdings and style both funds have and make up your own mind. But there is a lot of overlap.

Not everyone likes investment trusts because of the fact that they are usually bought via brokers and because they can suffer a widening discount. But bigger trusts like Edinburgh (EDIN) have generally more stable discounts. Edinburgh's has narrowed since Woodford took over. It averaged five per cent over the past 12 months and is currently two per cent.

There's a whole lot more (comparatively reader-friendly) information on Edinburgh in its latest annual report than you are ever likely to learn about Invesco Perpetual High Income.

And, as I said, you will be getting Woodford's services for roughly half the cost.

06 October 2010 9:43 AM

The Financial Services Authority is going to get tough on mortgages. And lenders aren't very keen.

The FSA wants to put a stop to interest-only loans, where borrowers are servicing the interest but not bothering to repay the capital part of their loan. And it's going to outlaw 'liar loans', where borrowers tell banks what they earn but don't provide any evidence - and hence get away with anything.

High time to rein the reckless lenders in, you might say - most people commenting on this report certainly did - but that's not the point I want to make here.

My point is about the FSA, and how all this talk of a tougher mortgage regulatory regime should prompt us to consider (yet again) the FSA's pitiful record as a watchdog over the past decade.